Rescuing Wall Street

by Shawn Scanlon

The Bailout legislation that recently passed was the only way to help the ailing economy.

At least that’s how it was sold to us. But the salespeople were wrong.  There were a myriad of ways that government could have helped during these difficult times.  But let’s look at at from a different perspective.  What bad things might have happened if the bailout legislation had not been passed?

  • College students are unable to receive loans to pay for tuition.
  • GM fails.  Every single person working there loses their job.
  • Home sales will plummet without the availability of credit.

Now, these aren’t the only economic problems that we might have faced sans-bailout, but those were three very strong arguments for passing the bailout legislation.  Here’s the problem: both political parties see a top-down $800 billion solution as the best approach to help the American economy.  A working-class friendly solution might have looked a bit more like this:

  • Government has an interest in the industry that they are subsidizing equal to the shares that are purchased, rather than giving money without control.  For example, the government could have purchased shares of AIG at $3 each; to have had a controlling stake would cost $4.035 billion.
  • College students would still have access to Pell grants and government loans.  The current crisis would have zero effect on the availability of these programs.  However, some students may have trouble finding private lenders.  The government could expand their loan programs to cover these students struggling to find loans.
  • Or, as another option, give every college student in America (pdf) a scholarship for $5,000.  This second option would cost $83.5 billion.  This would cut college costs in half for students attending public universities.  Students would still qualify for Pell grants and government loans.
  • GM has 266,000 employees.  A job works program could employ 1 million Americans for five years at a cost of $200 billion.  The average salary would be $40,000.
  • This last claim is simply untrue.  Rather than plummeting, home sales have done quite well, even in the current market.  People are still buying houses, and the government does not need to guarantee home ownership; giving mortgages that people can’t afford is a problem.  People with good jobs and good credit ought to own homes.  The government ought to treat the illness, not the symptom.

During the debate over bailout legislation, there were sober folks on each side of the issue providing good information.  So no, it wasn’t “smart” people versus “dumb” people in this debate.  In fact, a story on NPR noted that 200 economists (each of them smart) did not agree that the bailout legislation was necessary.  Of course, there were other economists who did believe that it was important to pass said legislation.  I don’t doubt their intelligence; I simply disagree with their method for stimulating the economy.

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5 Comments

Filed under Domestic Policy, Media

5 responses to “Rescuing Wall Street

  1. Robert Paulson

    Just surfing around different blogs and came across yours. Great stuff!

  2. Tony Robinson

    Hey Shawn–congrats on receiving comments from the big world outside our classroom!

    This is an interesting post, with provocative ideas about a bottom-up bailout. I question at least one of your points, when you claim home sales are doing well. Even though pending sales are rising, the facts are undeniable that home values nationwide have dropped substantially (rising sales or not)–with some markets down 25% or more. That’s a serious problem.

    Originally I was caught up in the bailout hype and felt he had to act and act now, but increasingly I think there were wiser voices out there who voiced ideas like yours. A huge bailout paying down mortgages of tens of millions of people, or directly financing college education would relieve the stress on millions of regular folk, and would quickly cycle money into financial institutions–so why in the world wasn’t a bailout like that on the table? You’re right that it should have received more consideration.

  3. Matthew Wolf

    Shawn,

    I also agree that the falling prices of homes, 7.1% between July 2007 and July 2008, is a problem, but am greatly reassured by the recent pick up in sales.

    One of your arguments doesn’t make sense to me. Why would the government want to buy AIG shares on the open market? This would essentially bail out shareholders who want to get out of their investment in AIG shares, but then the government would have a controlling interest in a company that would arguably still require some $85 billion in capital (assuming the amount already lent was needed) to stay afloat.

    In other words, why would the government want a controlling interest in an insolvent concern?

  4. Shawn_Scanlon

    Prof. Robinson:
    Obviously, you have a strong point regarding home values. That is absolutely a concern of mine as well. However, I’m not sure that there’s any realistic way for the government to guarantee assets be values at a certain level. I think that these home values are a symptom, not the sickness that needs treated. Good wages and lower costs of living will bring us around. Additionally, one could make the argument that the dropping home values aren’t (by the market standards) incorrect, but simply going back to more realistic levels.

    Matt:
    Actually, I agree with you. My point about AIG wasn’t that we should give them all this cash; it was that if this was truly worth the cost of lending $85 billion, why not spend a measly (in comparison) $4 billion to have a controlling stake. As it stands now, we are giving money without asking for a share in authority.

  5. Stephen Noriega

    The argument about the bailout on both sides holds the assumption that the 800 billion will be the only cost. Whether it be top-down or bottom-up, I believe that we the people will be asked several times before this is all over to foot the bill on an economy that has been floating on toilet paper since 1988. I wouldn’t be surprised to see that figure double as all the diseased institutions need mud jacking during this self-imposed disaster.

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